Any prospect of a cut in personal income tax rates in Thursday's Budget was emphatically ruled out by Prime Minister Helen Clark yesterday.

Though it might invite a backlash from voters already turning against Labour in opinion polls, the Budget is unlikely even to foreshadow a personal tax reduction in coming years.

The earliest a general tax cut might be signalled is in next year's Budget - an election year - and Finance Minister Michael Cullen reiterated yesterday that any cuts then would need to be sensible and affordable.

Final confirmation that Labour will not deliver personal tax cuts in this Budget came from Helen Clark, who yesterday affirmed signs that have been coming from Dr Cullen.

"It's been pretty well signalled that people should not expect personal tax cuts in the Budget," the Prime Minister told Newstalk ZB.

Calls for personal tax cuts were encouraged several months ago when several Government ministers suggested a cut in the corporate tax rate would likely have flow-on effects for personal rates.

AdvertisementAdvertisementThen the talk was dampened, only to be rekindled again by an Australian Budget seven days ago which delivered significant cuts for workers across the Tasman.

But the Government here is facing the awkward position of unveiling an operating surplus tipped to be at least $7 billion, while not being comfortable with cutting personal taxes because of the risk of further fuelling inflation.

Instead, Dr Cullen will announce a business tax package worth more than $1 billion a year, and is also expected to reveal a tax-based incentive tied to the KiwiSaver retirement saving scheme.

Savers will feel its benefit, but people who are not saving may miss out.

The risk of this move was highlighted last night in a TV3 poll which asked whether respondents wanted personal tax cuts in the Budget or the money directed elsewhere.

More than half - 58 per cent - said they wanted tax cuts. Exactly the same figure said Dr Cullen should be replaced if he did not deliver tax cuts.

Dr Cullen was yesterday unfazed by the poll and looked confident as he watched his eighth Budget roll off the presses at a Petone printer.

"Let's wait and see what comes out in reaction after the Budget," he said.

"A Minister of Finance is best when they're delivering the Budget, not a few days beforehand, because I know what's in it and obviously people don't."

The Budget would be "very substantial" and one for the longer term, he said.

He made special mention of yesterday's first-quarter retail sales data from Statistics New Zealand, which showed no sign of an end to the spending that is worrying the Reserve Bank and putting upward pressure on interest rates.

Retail sales topped economists' expectations and rose a seasonally and inflation-adjusted 3.8 per cent in the quarter, the largest increase since the series of figures began in 1995.

Dr Cullen said demand in the economy was too strong and the Budget would seek to address imbalances in the longer term.

The benefits of the Budget would become more and more apparent as time passed, and would possibly be "quite apparent" by late next year.

The final ruling out of personal tax cuts came on the same day that the Government announced a significant boost to its overseas development aid budget - taking it to $429 million.

The Pacific region will be the key beneficiary of the increase in aid.

National Party finance spokesman Bill English questioned how much traction the rumoured KiwiSaver tax incentives would gain outside higher-income earners.

Mr English said "middle New Zealand" was battling high debt levels and rising interest rates and could not afford to save.

Tax incentives traditionally worked for higher-income people because they had a choice of moving their savings out of shares or savings accounts to take advantage of the tax breaks.

"But most of these people will be in the top 10 to 15 per cent of incomes, and outside this group most households can't afford to save."

I know here in the USA, we get $1000 back for each independant, and all the donations we make to charities can be claimed back, and the interest paid on mortgages can also be claimed back(a large portion at least). I wonder how much of that happens in NZ?

Seems like the Labour government is slowly digging a grave for itself by doing more of what they want, than what their voters want.

The other day it was the Anti-smacking bill, now they have another HUGE tax surplus which they are not prepared to give back.

Now I am in no way an economist, so I cannot tell if it is for the best that no tax cuts are on the cards. What I do know is that when the budget is read, it better have some decent infrastructure improvement projects on the cards for at least a good part of the surplus, otherwise heads are definately going to roll. If this is not the case, it may be a good idea to keep an eye on the Labour bonusses they pay themselves?